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Purpose -This paper aims to identify the imbedded option value in price of auctioned land in Hong Kong, and to propose a more accurate valuation method in predicting land price. Design/methodology/approach -Based on records of land auctions and property transactions during two periods of very different market conditions, land prices are estimated using the traditional hedonic pricing method as well as the option model modified from Quigg. The results are compared to deduce whether there is any imbedded option value, thus concluding whether the option model facilitates a more accurate valuation of land prices. Findings -This study concludes that land auction prices have embedded option value in waiting to develop land. Option premiums increase with implied volatilities, which go up during market downturns, suggesting that developers place higher value on the option to develop during recessions.Research limitations/implications -The accuracy of the analysis may have been compromised by the limited number of land auctions conducted and the difficulties in inferring the value of multi-ownership residential buildings from sample transactions of their constituent individual units. Future research will benefit from a larger sample of transactions. Practical implications -This paper illustrates that real option models provide the property industry with a valuation tool that addresses the concern arising from the irreversibility of investment decisions.Originality/value -The study finds out the option premiums of vacant land in Hong Kong, lending empirical support to the application of option-based models for more accurate land valuation under different market conditions.

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Hong Kong is an international metropolis with a highly dense population. As a result, it faces enormous challenges in terms of land supply. As part of the Hong Kong Government's initiative to increase land supply, the Civil Engineering and Development Department (CEDD) proposed minor relaxation of the maximum plot ratio/building height restrictions for 21 target sites in Kai Tak Development Area (KTDA). Although CEDD has explored the feasibility of increasing development intensity by assessing environmental impacts, infrastructure capacity and public consultation, these reviews and assessments were conducted based on the 2D GIS. Since the spatial distribution of land unit in the real world is three-dimensional, 3D GIS can help us look into the world in true perspective and make informed decisions. This study aims to investigate the viability of minor relaxation of maximum plot ratio/building height restrictions of 21 sites in KTDA through 3D modeling and 3D spatial analyses, including skyline, visual impact, shadow and solar exposure. Regarding to the 21 target sites, four scenarios with different plot ratios and building heights were built and compared. The results indicate that minor relaxation of maximum plot ratio and building height leads to (i) minor effect on skyline (ii) minor effect on visual impact and (iii) slight changes in shadow and solar exposure both in winter and summer. Therefore, in light of the findings from this study, scenario 4 is the recommended reasonable scale to relax the maximum plot ratio/building height restriction for the target sites in KTDA. Besides, this study can also be applied in the urban renewal studies and other new development areas in Hong Kong, or even in other densely populated cities.